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Admitting shares of US issuers to AIM– what's changed?

AIM has stopped providing derogations from AIM rule 36 (electronic settlement of shares) from 1 September 2015 in order to comply with EU regulation and new electronic settlement procedures have been introduced for US issuers.

Previous Position

Historically, US domestic issuers (and other non-US issuers that did not qualify as "foreign private issuers") were prohibited from issuing equity securities (" Category 3 Equity Securities ") in non-certificated form for electronic settlement due to restrictions provided by US federal securities laws. These arrangements ran counter to the general rule (AIM rule 36) that securities admitted to trading on AIM had to be eligible for electronic settlement. The London Stock Exchange (" LSE ") regularly granted derogations from rule 36 for issuances of Category 3 Equity Securities and such securities therefore were issued and initially traded in certificated form, which unfortunately adversely affected the timing of settlement, liquidity and trading prices of these securities.

New Electronic Settlement Procedures

In accordance with EU regulation, with effect from 1 September 2015 all securities must be settled in electronic form. Accordingly the LSE has determined that derogations from AIM rule 36 will no longer be available from that date. However, the LSE, working with the CREST system ( "CREST ") operated by Euroclear UK and Ireland (" EUI "), has established electronic settlement procedures for the issuance and trading of non-certificated Category 3 Equity Securities that also are aimed to comply with US federal securities laws. These procedures (applicable during the "distribution compliance period" described below) include: (i) electronic identifiers indicating whether the security is a Category 3 Equity Security, (ii) electronic access to US securities law legends relating to restrictions applicable to Category 3 Equity Securities, and (iii) blockages on electronic settlement of Category 3 Equity Securities unless the purchaser provides the required certifications as to, among other things, its status as a non-US person and a non-affiliate of the issuer.

Impact under US federal securities laws

The U.S. Securities and Exchange Commission (" SEC ") has not issued definitive guidance as to whether the LSE procedures satisfy the requirements of US federal securities laws. Issuers and financial intermediaries therefore should seek advice from US legal counsel in the event that an issuer of Category 3 Equity Securities wishes to issue and admit such securities on AIM.

Read on for further details.

AIM rule 36 requires that all AIM securities must be eligible for electronic settlement. However, Category 3 Equity Securities historically were not eligible for electronic settlement due to the legend, transfer restriction and other procedures required under Regulation S of the US Securities Act of 1933, as amended ("Regulation S "). As a result of the Regulation S restrictions, Category 3 Equity Securities had to be initially issued and traded in certificated form only, and the LSE regularly provided derogations for such securities from rule 36.

For Category 3 Equity Securities, the requirements of Regulation S include the following:

Offers and sales of the securities must be made in an "offshore transaction" and "directed selling efforts" are prohibited;

Offers and sales of the securities may not be made to for the account of a US Person during the "distribution compliance period" – being 12 months for Category 3 Equity Securities or six months for Category 3 Equity Securities issued by a "reporting issuer";

During the distribution compliance period, various certifications are required from purchasers, including that the purchaser is not a US Person (as defined in Regulation S);

The Category 3 Equity Securities must contain a legend describing the restrictions provided by Regulation S; and

The issuer is required, by contract or in its organizational documents, to refuse to register any transfer of Category 3 Equity Securities that are not made in accordance with Regulation S.

As a result of these restrictions, historically Category 3 Equity Securities were issued and traded in certificated form during the distribution compliance period (6 or 12 months), after which they normally could be dematerialised into electronic form. During this distribution compliance period, however, these Category 3 Equity Securities were subject to delayed settlement periods and decreased liquidity, often resulting in adverse trading prices.

EU regulation (article 3 of the EU Regulation on Central Securities Depositaries) requires transactions in transferable securities that take place on a trading venue (such as AIM) to be settled electronically. As a result, on 7 August 2015 the LSE publishedAIM Notice 41, and corresponding guidance in Inside AIM, providing that derogation from AIM rule 36 in regard to Category 3 Equity Securities would cease to be available from 1 September 2015. However, the LSE, working with the EUI as the operator of the CREST system, established and published procedures to allow Category 3 Equity Securities to be issued and traded electronically and which at the same time are aimed to comply with Regulation S. These procedures are set out in the EUI's "Whitebook" and in AIM Notice 41. The Regulation S requirements have not been amended and so remain unchanged.

The Whitebook procedures apply during the distribution compliance period. They include:

electronic provision of restrictive legends relating to US securities law restrictions applicable to Category 3 Equity Securities, with participants required to read the legend before a trade can be settled through CREST; and

certifications required by any purchaser of a Category 3 Equity Security before a trade can be settled through CREST, which certifications include, among other things, that the purchaser is not a US person or an affiliate of the issuer and acknowledging that the Category 3 Equity Security is subject to the restrictions of the US federal securities laws.

In addition, Inside AIM reminds new AIM applicants that propose to issue Category 3 Equity Securities to request derogations from AIM rule 32 (transferability of shares) prior to admission and to clearly disclose on the application form that they are Category 3 Equity Securities.

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